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TMI Blog2017 (8) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... ree to carry out any other business. If all these facts are considered cumulatively, it becomes clear that the agent had no power to bind the assessee in any legal obligation. The assessee did not have a PE in India, that it was not carrying out any business activities in India and therefore no part of its revenue was attributable to India, that SIPL was an independent agent under Article 5(6)of the tax treaty between India and Holland, that the activities of the agent were carried out in its ordinary course of business, that the agent was not wholly and exclusively devoted to the assessee, that payments made to SIPL were at arm's length, that provisions of Circular 742 were applicable for determining the tax liability of the assessee. In short, the assessee was not liable to pay tax in India in any of the AY.s. mentioned above. Effective ground of appeal is decided in favour of the assessee. - ITA No. 5689 to 5695/Mum/2014 - - - Dated:- 26-7-2017 - Shri Rajendra, A . M . And Sandeep Gosain, J . M . For The Revenue : Shri Jasbir Chauhan - CIT - DR For The Assessee : Shri Porus Kaka Divesh Chawla ORDER Per Rajendra, AM : - Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exclusive right for sale of advertising time, in India, on the channels of the STAR TV Network, which was owned by STAR Limited. It engaged STAR India Pvt Ltd.(earlier known as News Television (India) Limited),an Indian entity, to procure business from Indian advertisers, on a commission of 15% of receipts from such business. The revenue, so earned by it, was offered to tax @10% on the basis of CBDT Circular 742,dated 02/05/1996.However,the Assessing Officer(AO),held that income in question was to be assessed in the hands of STAR Limited, Hongkong, that the assessee was only a conduit-company ,that it was brought into picture only because of India having a favourable tax double tax avoidance treaty(DTAA) with the Netherlands, that the assessee company was located in Hong Kong ,that Hong Kong did not have any tax treaty with India, that it was a clear case of treaty shopping. He finally held that the income in question actually belonged to STAR Limited. As a protective measure, he also assessed the income in the hands of the assessee. He declined benefit of Circular 742 to the assessee, on the ground that it was not a telecasting or broadcasting company. Invoking the Rule 10 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat agency PE was not there, that the agent (SIPL)was wholly independent, that it was not dependent on the assessee, that as per the contractual arrangement STAR India Private Ltd(SPIL)was not a PE of the assessee in India, that SIPL was a commission agent and was paid commission 15%for the services rendered by it to the assessee in connection with soliciting the advertisements and collection of revenue from the advertisers on behalf of the assessee, that the activities of SIPL were undertaken in the ordinary course of business, that SIPL was legally independent from the assessee, that the activities of SIPL were not devoted wholly on behalf of the assessee, that STAR India would also undertake agency activities for other channels, that it was also engaged in other businesses such as noticing/ procuring and supplying programs and acting as a licensee in India in respect of certain channels, that the remuneration paid to SIPL was at arm's length. It was also argued that when the agent would not satisfy the condition in para 6 of Article of the DTAA, laid down in clause 5 could be examined, that the agent covered by sub-section 6 would be an independent agent, that such agent wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Company hereby appoints the Agent as its non - exclusive independent agent in India to market television advertising for the said channel and the Agent uneqivocally accepts such appointment . Rate The Agent shall solicit the advertisements in India for the said channel at such rates as the Company may fix from time to time . Independent Agent ( a ) The Agent shall not have the right to enter into any contract for and on behalf of the Company and / or bind the Company in any way whatsoever . xxxxxx ( e ) This Agreement shall not restrict the Agent from carrying on other business, including agency business, to the extent that carrying on of such other businesses by the Agent would not be prejudicial to the interest of the Company in India . Client Requisition After having solicited the advertisements as above, the Agent shall forward, by facsimile or Telex, each clients requisition for telecast of the advertisement ( s ) to the Company and the Company reserves the right to accept or reject the aforesaid requisition at its sole discretion . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -6.The provisions of paragraph 5 will come into picture only if the agent does not satisfy the conditions in paragraph 6. In short, if the agent satisfies the conditions laid down in paragraph 6 (independent agent),it would not constitute a PE in India even if the independent agent satisfies the condition laid down in paragraph 5.SIPL is an independent agent under Article 5(6)of the DTAA, acting in its ordinary course of business and its activities were not wholly or exclusively devoted to the assessee. SIPL was not economically dependent on the assessee, as it was engaged in a business activities like undertaking agency activities for NGC Network Asia LLC, producing/procuring and supplying program and acting as a licensee in India in respect of certain channels. The activity of media agent for channel was within the ordinary course of business activity of SIPL. We find force in the argument advanced by the assessee that activities of SIPL were no different from other agents of foreign telecasting companies operating in India. The India-Netherlands DTAA provides that when the activities of the agent are devoted wholly or almost wholly on behalf of the enterprise it would not be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission @of 15% by the assessee to its agent i.e. to SIPL was at arm's length. 6.3 One more issue to be deliberated upon is the applicability of Circular No.742. In our opinion, Circular 742 was introduced to lay down mechanism for determination of tax ability of advertisement revenue earned by foreign companies. The assessee had filed original return and later on had revised the return. In both the returns it had offered the tax as per the guidelines of the Circular 742. It is a undisputed fact that the benefit of the said circular was granted by the AO to the assessee in the AY.s 1995-96 and 1997-98 and that the FAA had also endorsed the granting of benefit to the assessee as per the Circular. Paragraph 2 of the assessment order for the AY.1995-96 reads as under: The assessee has filed both the returns on the basis of presumptive rate of net profit at 10 % is laid down in the guidelines contained in Circular No . 742 dated May 2, 1996 issued by the Central Board of Direct Taxes, New Delhi . Pages 109-111 of the PB are the orders of the AO.s passed u/s.197 of the Act on 08/05/1998, 19/05/1999 and 18/04/2000.In all these orders, the they have referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s business activities in India where wholly channelled through its agent, that the contracts to sell were made outside India, that the sales were made on a principal to principal basis. Considering the provisions of the India-Singapore DTAA it was held that as the assessee had remunerated SET India on an arm' s length basis and that as pre article 7(2) of the DTAA no further profits should be taxed in the hands of the assessee. The FAA, however, proceeded to hold that as the assessee itself had revised the return of income and offered the income to tax there was no reason to interfere with the order of the AO. In so far as distribution of revenue from AXN channel he held that distribution income belongs to SET India and not to the assessee. The said income had been offered to tax by SET India and had already been taxed in its hands. With regard to distribution rights it was held that same were commercial right and were distinct and different from a copyright and consequently there was no question of payment of royalty. Cross appeals were filed by the AO and the assessee before the Tribunal. After considering the rival submissions, the Tribunal held SET India was a dependen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertisement revenue received by the appellant was not taxable in India as long as the treaty and the Circular stood . 15 . From a reading of article 7 ( 1 ) of the DTAA it is clear that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein . The profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment . In paragraph ( 2 ) while determining the profits attributable to the permanent establishment the expression used is estimated on a reasonable basis . The DTAA does not refer to the arm' s length payment . The principles contained in the matter of income from international transaction on an arm' s length price are contained in section 92 of the Income - tax Act . The principles have been clarified by the Finance Act, 2001 as also the Finance Act, 2002 . From the order of the Commissioner of Income - tax, which has been accepted it is clear that the appellant herein has pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was held that the advertisement revenue received by the appellant may be from the customers in India is not liable for tax in India . That Central Board of Direct Taxes Circulars are binding needs no repetition . If authorities need be cited, we may now refer to the judgment of the Supreme Court in UCO Bank v . CIT [ 1999 ] 237 ITR 889 . In that judgment the issue was whether Circular of October 9, 1984, was inconsistent or whether there was contradiction in the circular and section 145 of the Income - tax Act . The Supreme Court observed that ( page 901 ) : In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender . The circular, therefore, cannot be treated as contrary to section 145 of the Income - tax Act or illegal in any form . It is meant for a uniform administration of law by all the Income - tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income - tax Act . As such, the circular would be binding on the Department . 18 . See also CIT v . Hero Cycles P . Ltd . [ 1997 ] 228 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt with the Double Tax Avoidance Agreement ( DTAA ) between India and United States . That treaty advocated application of the arm' s length principle or provided a mechanism for avoiding double taxation on income . The issue involved, Morgan Stanley and Company ( for short, the MSCo . ) and one of the group companies of Morgan Stanley, Morgan Stanley Advantages Services Pvt . Ltd . ( for short the MSAS ). An agreement was entered into for providing certain support services to MSCo . MSCo . outsourced some of its activities to MSAS . MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing IT enabled services such as back office operations, data processing and support centre to MSCo . On May 5, 2005, MSCo . filed its advance ruling application . The basic question related to the transaction between the MSCo . and MSAS . The advance ruling was sought on two counts ( i ) whether the applicant was having permanent establishment in India under article 5 ( 1 ) of the DTAA on account of the services rendered by MSAS under the services ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Rulings was right in ruling that as long as MSAS was remunerated for its services at arm' s length, there should be no additional profits attributable to the applicant or to MSAS in India . After considering the various methods by which arm' s length price can be determined the court observed as under ( page 440 ) : As regards determination of profits attributable to a permanent establishment in India ( MSAS ) is concerned on the basis of arm' s length principle we have quoted article 7 ( 2 ) of the DTAA . According to the Authority for Advance Ruling where there is an international transaction under which a non - resident compensates a permanent establishment at arm' s length price, no further profits would be attributable in India . In this connection, the Authority for Advance Ruling has relied upon Circular No . 23 of 1969 issued by the Central Board of Direct Taxes . This is the key question which arises for determination in these civil appeals . 21 . After discussing the various issues the Court in its conclusion held as under ( page 443 ) : As regards attribution of further profits to the perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon Circular No . 23 of 1969 . That Circular read with article 7 ( 1 ) would result in holding that advertisement revenue received by the appellant are not taxable in India as long as the treaty and the Circular stands . 24 . In the light of the above appeal filed by the appellant herein is allowed and the order of the Income - tax Appellate Tribunal is set aside . 6.4.1 We would also like to refer to the case of B4U International Holding Ltd (supra). In that matter the tribunal has held as under: Coming to the alternate argument even if it is held that there is a PE of the assessee in India, then we would hold that the rate of commission of 15 % was accepted as ALP by the TPO for the AY 2003 - 04 to 2004 - 05, no further profit is attributable to the PE . This is the rate mentioned in the CBDT Circular No . 742 of the order 1996 . Similar rate is accepted by the Hon'ble Bombay High Court in the case of Set Satellite ( Singapore ) Pte . Ltd . ( supra ). Thus we have no agitation in upholding the contention of the assessee that the payment was at arms' length . When the payment is at ALP there is no f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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